EZCORP, Inc. — Form 10-Q Summary
Reporting period: Third fiscal quarter and nine months ended June 30, 2013; comparisons are to the corresponding 2012 periods. Unaudited results. Dollar amounts below are in millions unless noted.
Business context
EZCORP provides pawn loans, consumer lending and buy/sell retail services through stores and online channels in the U.S., Mexico, Canada and the U.K. It also holds equity-method investments in Albemarle & Bond and Cash Converters International. At quarter-end, it operated 1,424 locations and had interests in Grupo Finmart, TUYO and Cash Genie.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $235.2, up 4.7% from $224.6 | $775.9, up 7.6% from $721.2 |
| Operating income | $25.2, down from $40.5 | $126.6, down from $152.9 |
| Operating margin | 10.7%, versus 18.0% | 16.3%, versus 21.2% |
| Income from continuing operations attributable to EZCORP | $15.6, versus $29.8 | $83.6, versus $108.3 |
| Discontinued-operations loss, net of tax | $(21.5), versus $(1.2) | $(24.8), versus $(3.2) |
| Net income (loss) attributable to EZCORP | $(5.9), versus $28.5; diluted EPS $(0.11), versus $0.56 | $58.8, versus $105.1; diluted EPS $1.10, versus $2.06 |
Quarter revenue growth came from pawn service charges (+8.5%) and consumer loan fees (+14.5%); total sales declined 2.5%, as higher merchandise sales were outweighed by lower jewelry scrapping sales. Nine-month consumer loan fees rose 27.5%, while jewelry scrapping sales fell 22.8%. Operations costs rose 22% in the quarter and 25% year to date, contributing to lower operating income. Consumer loan bad debt expense rose 17.1% in the quarter and 26.5% year to date.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $99.4, versus $109.7 a year earlier. Investing used $108.9, including $33.4 in property and equipment and lending activity; financing provided $7.7. Cash decreased $2.5 to $46.0.
- At June 30, total assets were $1,354.2, total liabilities $357.9 and current assets $498.6 versus current liabilities of $133.6 (a derived current ratio of approximately 3.7). Cash was $46.0.
- Reported debt was $231.9, including current and long-term debt; this includes subsidiary and non-recourse borrowings. The $200 revolving facility had $122.5 drawn and $75.7 available after a $1.8 letter of credit. The facility was increased from $175 to $200 in May. EZCORP reported compliance with covenants at quarter-end.
- Grupo Finmart had $109.4 of third-party debt, non-recourse to EZCORP, at a weighted-average rate of 11%. A further $32.3 of securitization debt is payable solely from designated loan collections and is also non-recourse.
Material changes, outlook and risks
- Store reorganization: The company approved closure of 107 legacy locations: 57 in Mexico, 29 in Canada and 21 in the U.S. (20 financial-services stores and one jewelry-only store). It recorded $23.8 of pre-tax exit charges, including lease costs and asset and inventory write-downs. No cash payments on these recorded charges had been made by June 30. The closures drove most of the quarter’s discontinued-operations loss.
- Operating plans: Management expected to open approximately 15 stores in the fourth fiscal quarter and continue growth in online channels and new products. It planned about $2.0 of capital spending for remaining fiscal-year store openings, plus working capital and start-up costs. Management said new stores can weigh on earnings and liquidity until their second year.
- Liquidity outlook: Management expected operating cash flow, cash on hand and revolver availability to fund contractual obligations, planned growth, capital expenditures and working capital over the coming year.
- Business pressures: Management cited weaker gold-related scrapping economics and competitive pressure on jewelry margins. U.S. and Canada segment contribution fell to $30.3 from $44.4 in the quarter. Local ordinances in Austin and San Antonio reduced financial-services profitability by about $1.0 in the quarter and $3.0 year to date.
- Regulatory exposure: The CFPB had signaled continued scrutiny of short-term small-dollar lending and indicated it may use its rulemaking authority. Texas legislation that could have restricted fees did not advance in the recent session; future regulatory outcomes remain uncertain.
- Investments and market risks: Albemarle & Bond reported weaker expected profits amid gold-market challenges and competition. EZCORP’s investment fair value was $33.9 versus a $52.3 carrying value; management considered the decline temporary. The filing also identifies exposure to gold prices, foreign exchange and variable interest rates; a 50-basis-point rate increase for the remaining fiscal year was estimated to add about $0.2 to interest expense.
- Contingencies: The company is subject to various legal and regulatory matters and said it did not expect their resolution to materially affect financial condition, results or liquidity, while noting outcomes cannot be assured.
Important facts for investors to verify
- Whether the 107 closures, restructuring charges and related cash costs are completed as planned, and how continuing-store performance develops.
- Whether lower gold-related proceeds and margins persist, and whether pawn and consumer-lending growth offsets weakness in U.S. and Canada contribution.
- Consumer-loan credit quality, bad debt trends, and any effects of CFPB, state or local regulatory changes; the filing reports maximum letter-of-credit exposure of $28.8 and an allowance of $2.2.
- Revolver availability, covenant compliance, subsidiary debt and the repayment sources for non-recourse securitization borrowings.
- Whether the Albemarle & Bond fair-value decline remains temporary and how foreign-currency movements affect reported results and equity.